Dolce & Gabbana sees sales slowdown in China after ad backlash

Italian fashion house Dolce & Gabbana expects sales in China to fall in the current fiscal year after a slowdown in 2018-19, in a sign the brand is still struggling to shake off the fallout from a controversial advertising campaign in the country.

Chinese customers account for more than a third of spending on luxury products worldwide, and are increasingly shopping for these in their home market rather than on overseas trips.

Dolce & Gabbana's overall revenues in the year ended March 2019 grew 4.9% to 1.38 billion euros (£1.25 billion), more than half of which came from sales in shops and outlets, the group said in a filing to Italy's Chamber of Commerce seen by Reuters.

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But the Asia-Pacific market shrank to 22% from 25% of total turnover and the group expects sales in Greater China to decline in the current fiscal year, ending in March 2020, the filing said.

Dolce & Gabbana, which does not publicly disclose its results, was not immediately available for a comment.

Last November the group was forced to cancel a marquee show in Shanghai amid a spiralling backlash against an advertising campaign that was decried as racist by celebrities and on social media and led to Chinese e-commerce sites boycotting D&G products.

Users reacted angrily to a series of adverts showing a Chinese woman struggling to eat pizza and spaghetti with chopsticks. The blunder was compounded when screenshots were circulated online that appeared to show co-founder Stefano Gabbana making negative remarks about China, even though the designer said his account had been hacked.

Gabbana and co-founder Domenico Dolce later asked for China's "forgiveness" in a video posted on China's Twitter-like platform Weibo, trying to salvage a crucial market for the luxury brand.

The company's results filing does not mention the ad controversy but refers to global trade tensions and a slowdown in China's economy as clouding the overall outlook. Recent protests in Hong Kong have also been cited by global fashion brands as a negative factor.

The slowdown in Asia contrasted with the Americas, where sales increased to 16 percent of 2018-19 turnover from 13 percent a year earlier. Other markets remained stable, with Italy accounting for 23% of revenues, Europe 28% and Japan 5%.

Overall sales are expected to increase slightly in the current fiscal year but with costs at almost 60% of revenues, profitability is suffering.

In the last fiscal year, Ebitda - earnings before interest, tax, depreciation and amortisation - fell by more than 40% to 87.2 million euros, with a contraction in margins to 6.3% from 12.2% of sales.

However the group said things could improve in the second part of the 2019-2020 year.

"The good start of the Fall/Winter retail season could be the sign of a better than expected second half of the year," it said.

The latest industry 2019 outlook, released by consultancy Bain in June - at the onset of the Hong Kong protests - forecast a 4% to 6% increase in global sales of luxury goods at constant currencies thanks largely to booming Chinese demand. Mainland China is expected to rise 18-20%.